Is to Forgive to Forget? Sovereign Risk in the Aftermath of Private or Official Debt Restructurings

Silvia Marchesi, Tania Masi () and Pietro Bomprezzi ()
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Tania Masi: “G. d’Annunzio” University of Chieti-Pescara
Pietro Bomprezzi: University of Milano-Bicocca

IMF Economic Review, 2024, vol. 72, issue 1, No 8, 292-334

Abstract: Abstract We examine the link between sovereign defaults and credit risk by distinguishing between commercial and official debt and by taking into account the extent of the final restructuring events, which take place at the end of a default spell. We use a local projection-based approach, combined with propensity score weighting (Jordà and Taylor 2016), to estimate the average treatment effect of the final restructuring on our outcome variables of agency ratings and bond yield spreads. Our results show that the average treatment effect on ratings is negative (and positive for bond spreads) up to seven years following the final restructuring with private creditors, while the opposite holds for official creditors. Furthermore, our results are robust to using a panel analysis, which allows us to investigate the importance of the final haircut size. Specifically, we find that the rating (spread) variation (increase) is larger for cases with deeper haircuts. Therefore, we find evidence that official and private defaults have different costs and then may induce selective defaults.

Keywords: Sovereign defaults; Haircut; Credit rating agencies; Bond yield spreads; Local projection (search for similar items in EconPapers)
JEL-codes: F34 G15 G24 H63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41308-023-00198-8

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